The Long-Term Fundamental Case for Gold

“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”

~ United States Constitution, Excerpt from Article 1, Section 10 ~

A quick glance at most of the headlines over the weekend and the primary focus seemed to be either calling a near term top in domestic equity indices or a focus on the Greek debt situation. Why is anyone even paying attention to what is going on over there? Until the ISDA declares a default where the underlying Credit Default Swaps (CDS) are triggered, it is all just noise.The ECB has broken the rule of law by placing itself as the senior creditor ahead of private creditors, the Greek government is trying to pass retroactivelegislation to trap private sector creditors holding out of the PSI, and the leader of Greece was not even elected by the people of Greece – how much more manipulation and insanity do we need to monitor?Similar to the price action since 2008, central banks around the worldcontrol everything from financial markets to the ascent of political leaders.These same political leaders help central bankers and planners control policy and decision making at the highest government levels in Europe and around the world. It would seem that the United States should change the motto from “We the People” to “We the Bankers.”However, there is one particular asset class that even the central bankers have a hard timecontrolling.While they can impactshort term price action through direct currency manipulationinitiatives, in the longer-termgold is likely to move in only one direction – higher.The price action on Tuesday reminded market participants that actions such as the Greek bailout come at a cost. Quantitative easing and/or printing money (depending on what one wishes to call the practice of producing fiat currency out of thin air) has a direct impact on the price of gold.Many financial pundits argue that gold has no utility, but what they fail to recognize is that gold is the senior currency to all other fiat currencies. Silver is also a form of currency and is senior to all other fiat currencies as well. While one can draw the utility of gold into question, the idea that gold is the senior most currency to all other fiat currencies is not new.The Constitution of the United States of America, which is over200 yearsold, refers to gold and silver as forms of payment.Looking backthousands of years the Romans used gold coins as a form of currency. The idea that gold and silver are currencies is certainly not a grandiose thought or a stretch of historical concept. Trying to depict gold as a worthless asset depends on your view and consideration of fiat currency.There are those that would argue that the Federal Reserve of the United States is not actively manipulating economic conditionsdomestically or abroad.For those that view gold as a poor investment or hedge against currency devaluation need to consider the charts illustratedbelow. The chart below was produced by Thomas Gresham of Gresham’s Law.

.Total Asset Growth of the Federal Reserve System – 1915 – 2012.

It is rather obvious by looking at this chart that the Federal Reserve has actively sought to enter domestic and foreign financial markets.The surge in balance sheet assets serves to provehow far the Federal Reserve Bank is willing to go to maintainmarkets which seemingly are only allowed to move higher over time.

This chart is bearish for nearly any form of paper backed assets.The above referenced chart is long-term bearish for the Dollar and Treasuries and long-term bullish for physical gold and silver. As the Federal Reserve continues to debase the U.S. Dollar in concert with other central banks’ monetary easing programs, gold and silverpricesover time are destined to move higher in virtually every form of fiat currency.

During the same time frame that the Federal Reserve has seen its balance sheet grow exponentially, the rapid rise of M2 money supply is staggering. The long term chart of M2 is compared to gold futures in the charts presented below.

M2 Money Stock

.Gold Futures Monthly Chart

It is rather obvious what has happened to the price of gold as the M2 money supply has grown.The idea that the Federal Reserve has not already destroyed a significant amount of the purchasing power of the Dollar can easily be refuted by the twocharts shown above.

In the short-term, gold and silver could suffer from a pullback, but in the intermediate to longer term it is unlikely that we have seen the highs of this bull market for either metal.As long as central banks around the world continue to print money and expand their balance sheets gold and silver will remain in a long-term bull market. The daily chart of gold futures is presented below..Gold Futures Daily Chart

.As can be seen above, it is not out of the question that we could see gold pullback to test one of the key moving averages in coming days/weeks. However, I expect the key support area to hold in the event of a sharp selloff. Ultimately, I expect to see a breakout over the resistance zone in the days/weeksahead. However, I would not be surprised to see gold consolidate or work marginally lower from current prices before breaking out to the upside. Right now the primary threat in this fledgling goldrally is a short-term spike higher in the U.S. Dollar. The primary catalyst which could drive a flight to the Dollar involves the sovereign debt situation in Greece and the Eurozone as a whole.

While the short-term price action may be bearish, the intermediate to longer term time frames are quite bullish for metals as central banks will continue to race to debase their currencies.Quantitative easing in the U.S. and around the world will become pervasive and gold prices could potentially soar in value. The data from the Federal Reserve Bankitself suggests that they are indeed increasing the money supply. As time has passed, the money supply and gold have seemingly grown in lockstep with one another. Surely inquiring mindsdo not consider this mutual relationship between gold and the money supply to be purely coincidental.

As further evidence that the Federal Reserve continues to use quantitative easing to manipulate asset prices through direct entry into financial markets, a chart of the velocity of M2 clearly depicts that the velocity of money is declining. I am not an expert regarding macroeconomic data, but if the velocity of money is declining to 1960’s levels would it be a stretch to say that we may be going through a period of stagflation? The chart belowillustrates the Velocity of M2Money Stock courtesy of the St. Louis Federal Reserve Bank.

.Velocity of M2 Money Stock .

For those unfamiliar with the term velocity of money, it is simply the rate of turnover in the overall money supply.The velocity of M2 is expressed as the number of times that a Dollar is used to purchase final goods or services which are included in the total gross domestic product.

.Conclusion

..The short term technical picture in gold is a bit suspect due to overhead resistance and recent U.S. Dollar strength. However, the longer term macro factors that impact the value of the U.S. Dollar and precious metals are all telling us the same thing.

As time wears on and central banks do even more to prop up the broader economy and failing financial institutions, it is without question in my mind that gold and silver will both benefithandsomely from these decisionsbeing made by central bankers from around the world.

Ultimately, I am very bullish of gold and silver in the intermediate to longer-term, but in the immediate short-term framegold could consolidate or pullback before breaking out to the upside.

PARIS – In the twentieth century, the American dream of a middle-class life inspired the world.Now, in the twenty-first, we are moving at high speed toward a world based on a new geography of growth, with millions of people in the east and the south moving out of extreme poverty to become potentially powerful middle-class consumers. Whether the dreams of this new global middle-class are realized or turn into a nightmare depends on several factors.In today’s shifting world, with GDP in roughly80 developing economies rising at twice the rate of per capita growth in the OECD, the club of the world’s richestcountries, middle-class citizensparadoxically complain and protest regardless of whether fortunesimprove or decline.Moises Naim, a former Venezuelan minister of trade and industry, even warns of a possible “emerging global war of the middle-classes.”While anger over pay cuts and unemployment make sense, it is harder to understand the current protests in fast-growing countries like Thailand and Chile, where standards of living are improving.What is going on?High growth in Asian and southern countries has meant greater export earnings and rents from natural resources.Unfortunately, this blessing can turn into a curse. In China, former Communist leader Deng Xiaoping’s vision – “let some people get rich first” – has led to impressive economic growth and poverty reduction; but it has also undermined the self-proclaimed “harmonious society,” as recent protests and labor conflictsindicate.Indeed, it is telling that, in the spring of 2011, Beijing’s municipal authorities banned all outdoor luxury-goods advertisements on the grounds that they might contribute to a “politically unhealthy environment.”Rising inequality, lack of civic participation, political apathy, and a dearth of good jobs, particularly for the young, comprise the Achilles heel of emerging-market countries’ current development model. A Gallup poll on subjective well-being in Tunisia and Thailand shows that, while income levels and social conditions in both countriesimproved between 2006 and 2010, life satisfaction dropped.Homi Kharas, a senior fellow at the Brookings Institution in Washington, DC, defines today’s global middle class as households with daily expenditures of $10-100per person (at purchasing power parity). This represents approximatelytwo billionpeople, split almost evenly between developed and emerging economies.

In its Perspectives on Global Development 2012 – Social Cohesion in a Shifting World, the OECDforecasts that, by 2030, the global middle class could total4.9 billion. Of these, 3.2-3.9 billion will probably live in emerging economies, representing 65-80% of the global population.

These people will demand more and better services, a fairer division of growth’s benefits, and more responsive political institutions.The current wave of protests could be just the beginning of this trend.

So, what should be done?First, more extensive social protections must be instituted. Most of the emerging middle class is one income shock from being pushed back into poverty. To counter this risk, social-security programs should be gradually extended beyond social assistance.India’s Employment Guarantee Scheme, Ghana’s national health-insurance program, and Lesotho’s tax-financed pension plan, which covers more than 90% of its population, are all instructivesocial-protection models for the emerging middle classes.Second, more (and better) jobs are desperately needed.The global labor force is three billion, of which two-thirds are informally employed. Indeed, in countries like India, the number of jobs without social protection has increased, despite sustained growth. In Tunisia, the probability of unemployment actually rises with higher levels of education, reaching nearly 30% among the highest-qualified individuals, compared to only 8% among the least skilled. Education in the developing world must bereformed to cater to the demand for skills.Third, a social contract – one that entails better services and greater government accountability – is essential to improving fiscal policy and mobilizing domestic resources.In countries whose populations are genuinely enfranchised, and where they benefit from good-quality public services, social trust rises, and citizens are more willing to pay taxes. Opinion polls show that in countries where individuals do not trust one another, more thanone-third of the population finds taxevasion acceptable. This number drops to one-tenth in countries where people trust each other most.Finally, as the Arab Spring demonstrates, any state that does not give its citizens adequate space to exercise their voice, and thereby strengthen loyalty, is ultimately unsustainable.Governments must accept pluralism, and social media such as Facebook and Twitter should be permitted to facilitate citizens’ exchange of opinions. Kenya’s Ushahidi Platform, which allows Internetusers to quickly access information about human-rights abuses such as human trafficking, is a sophisticated example of how technological resources can provide citizens with powerful tools to monitor their governments’ behavior.The rise of the global middle class will transform the world’s social, political, and economic landscape.Fostering cohesive societies – in which people feel protected, citizens trust one another, and efforts are rewarded – is the key to realizing its members’ dreams.

Johannes Jütting is Head of Poverty Reduction at the OECD Development Center in Paris. He writes in his personal capacity.

Have you ever had any doubts about gold? Does it sometimes feel like it should be performing better? Are you concerned about its volatility? Do you worry about how it might perform in the future? Have you ever wondered about its true purchasing power? Maybe nervous about a big drop in price again? I decided to go directly to the source to address these concerns: Gold himself. He put his arm around me and asked me to tell you a few things...

I hear that you've had some worries about me. I understand. Your world is a very uncertain place right now. And when it comes to money, it looks as though your leaders don't understandsome basic monetary principles, making things even more unsettling.

But I want you to know that the problems you're experiencing are actually nothing new.I've seen these monetary, fiscal, and economic difficulties many timesbefore. And I can tell you this: you're safe with me. That's a boldproclamation, but I've providedmonetary protection numerous times throughout history - too many to count, in fact. I've served allkinds of people over the centuries, from kings and counts to serfs and servants.

To put your mind at ease, let's review my core characteristics, along with some history, to show how I can protect you against the monetary danger that's likely to worsen in your near future.We'll also take a look at your peculiar set of circumstances to see how I can be of service. By the time we're done, I think you'll feelmuch better about my ability to help your portfolio withstandwhatever is thrown its way.

.Enduring Characteristics

.Let's start with the basics. I have some characteristics that no other matter on Earth has...

I cannot be: .• Printed (ask a miner how long it takes to find me and dig me up)
.• Counterfeited (you can try, but a scale will catch it every time)
.• Inflated (I can't be reproduced)

.I cannot be destroyed by; .

• Fire (it takes heat at least 1945.4° F. to melt me)
.

• Water (I don't rust or tarnish)
.

• Time (my coins remain recognizable after a thousand years)

I don't need:

• Feeding (like cattle)

• Fertilizer (like corn)

• Maintenance (like printing presses)

I have no:

• Time limit (most metal is still in existence)

• Counterparty risk (remember MF Global?)

• Shelf life (I never expire)

As a metal, I am uniquely:

• Malleable (I spread without cracking)

• Ductile (I stretch without breaking)

• Beautiful (just ask an Indian bride)

As money, I am:

• Liquid (easily convertible to cash)

• Portable (you can conveniently hold $50,000 in one hand)

• Divisible (you can use me in tiny fractions)

• Consistent (I am the same in any quantity, at any place)

• Private (no one has to know you own me)

I am internationally accepted, last for thousands of years, and probably most important, you can't make any more of me.

."Gold Is Money"

.You've heard that statement before - but do you know what it really means? Money is a medium of exchange and a store of value. Almost anything can be used asmoney, but obviously some things work better than others. It's hard to exchange things people don't want' and other things don't storevalue well. Over thousands of years, I have emerged as the best form of money (along with silver).
. ..The paper dollars in your wallet are technically a currency, not real money. In other words, they are a government substitute for money. The man you call Aristotlebest defined the primary reasonswhy I'm considered money: a good form of money must be durable, divisible, consistent, convenient, and have value in and of itself.

...• It must be durable because you can't have your money disintegrating in your pocket or bank.That's why you don't usewheat; it can rot or be eaten by insects.

• It must be divisible, which is why you don't use diamonds or artwork; they can't be split into pieces without destroying the value of the whole.

. .• The lack of consistency is why you can't use real estate.One piece is always different from another piece.

.• It must be convenient, which is why you don't use other metals like lead.The coins would have to be too big to handle easily to be of sufficient value.
.

• It must have value in and of itself.This is why you shouldn't use paper as money.

.
• And one more thing: I can't be created out of thin air. Not even the kings and emperors who clipped and diluted gold coins used paper as money, so Aristotle didn't include this in his list, but it's vital.

.So you see, there's no superstition here. It's simply common sense. I am particularly good for use as money, just as aluminum is good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. If you try to make airplanes out of lead or money out of paper, you're in for a crash. . .And by the way, don't fret about those who say I'm not as good an asset as an income-producing vehicle.They misunderstand my role. I'm not trying to be a stock, for example. My function is as money and a store of value, so the proper comparison is to your dollars, or what you call Treasury Bills (of similar nominal value). And here is where I excel and serve my purpose: since 1913, the US dollar has lost96% of its purchasing power. I have lost none.

Remember, I am the only financial asset that is not simultaneously someone else's liability.I don't require the backing of any bank or government.

.The History Lesson

..Because I am eons old, I've observed something throughout history that you may not have thought much about: government fiat currencies are a relatively new invention, and none has endured. Eventually, they have all failed. Me? I've never been defaulted on or worthzero.Remember this the next time you have any doubts about my long-term worth.

.Another of my roles is to protect your purchasing power.Here are a few examples of how my purchasing power has endured:

.• During the time of Christ, an ounce of me purchased a Roman citizen his toga (suit), a leather belt, and a pair of sandals.Today, one ounce will still buy a good suit, a leather belt, and a pair of shoes.

.• In400 BC, during the reign of King Nebuchadnezzar, some scholars reported that an ounce of me bought350loaves of bread.Today, an ounce still buys about 350loaves ($1,700divided by 350 = $4.85/loaf).

.• In 1979, my average price was $306.68.This bought an average-priced full-size bed. Thirty-threeyears later, $1,700 would still buy you a nice full-size bed (and then some).
You can rest assured that over time, I will hold my value. And when you near the end of your life, you can pass me on to your loved ones, knowing full well they will have something that cannot be devalued, debased, or destroyed.

.What Color Is Your Money?

.Like you, I'm concerned about the current state of fiscal and monetary affairs. It seems your government leaders have boxed themselves into a corner. They've incurred too much debt and are spending too much money. It's important that you understand some lessons from history about this kind of behavior so that you're certain of what I can do for you.

.The common denominators that lead to the downfall of every fiat currency are the two big Ds: debts and deficits.With that in mind, consider the following:

.• Morgan Stanley reported that there is "no historical precedent" for an economy that exceeds a 250%debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation.US total debt currently exceeds GDP by roughly 400%.

.• Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currencyunits) when they exceed80% of GDP. US government debt will exceed 100% of GDP thisyear. .

• Investment legend Marc Faber reports that once a country's payments on debt exceed 30% of tax revenue, the currency is "done for." By some estimates, the US will hit that ratio this year. . .• Peter Bernholz, a leading expert on hyperinflation, states unequivocally that "hyperinflation is caused by government budget deficits." Next year's US budget deficit is projected to be$1.3 trillion.
. .The solution many of your leaders are pursuing is to create more currency units.Here's an updatedpicture of the increase in the US monetary base vs. my rise in price since 2008, when your problems starting surfacing.

.

.The monetary base has grown205.8%, while my price is up65.8%.This alone implies that my price in dollars is likely to climb much higher.

.This is also the reason why I'm not in a bubble, as some have tried to claim.It is your central banks and bond markets that are in a bubble. The fact that my price is rising is a warning that what your leaders are doing is unsustainable and potentially dangerous to your currency.

.Think about this: the US has debtbacked by debt, based on debt, dependent on debt, and leveraged with debt. You can, for example, buy a bond (i.e., lend money) on margin (i.e., with borrowed money). This is not a sound way to run financial markets.

. .Meanwhile, the warning bellscontinue to sound regardingEurope's debt crisis.In just the past30 days: . .• Moody's cautioned that it may cut the triple-A status of France, Austria, and the UK; and it downgradedsixother European nations including Italy, Spain, and Portugal.

.• Fitch downgraded Belgium, Cyprus, Italy, Slovenia, and Spain, and stated there was a 50%chance of further cuts in the nexttwo years. .

• Standard & Poor's downgraded34 of Italy's37banks...

• Moody's warned just last week that it may cut the credit ratings of 17global financial institutions and 114 European ones.

.The European crisis is far from over; and the path of least resistance for politicians is to create more currency units.This action can and will have clear and direct consequences: currencies will devalue, and inflation - perhaps hyperinflation - will result.

.Once again, I encourage you to use me to protect some of your wealth.

..How Much Is Enough?

.Given the state of your monetary system, you should accumulate me (and silver) on a regular basis.Just buy some every month and put it in a safe place. After what I've witnessed throughout history, and based on the current path your government leaders insist on pursuing, I suggest using me as your savings vehicle instead of putting dollars in a bank.

..If you don't own enough of me when these fiscal troubles really accelerate, I fear you will regret it.I've warned many in the past about the dilution of nations' currencies, and those who didn'theed my warnings experienced severe financial pain. Excuseswon't pay the mortgage nor feed the family when the effects of currency debasement hit your home and pocketbook.

,Make sure you own enough of me to make a difference to your portfolio.This means having more than a couple coins or a few shares of GLD, the latter of which is only a proxy for my price.

.How do you know if you own enough? Ask yourself:

.• If inflation returns, or even hyperinflation hits...

• If the economy is flat...

.• If uncertainty and fear continue around the globe...

.• If stock markets languish...

.• If the amount of spending from the world's governments proves futile...

.• If government interference in the economy continues to increase...

.• If the value of the US dollar takes a major fall... .

• If the world enters a recession or depression...

.• If you wonder if you have enough "safe" money...
... would you feel that you own enough of me?

.Buy a sufficient amount so that as your currency continues to lose value, your portfolio won't.If you do your part, I promise that I'll do mine.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.